The Coinbase Effect On Risk Assets

Coinbase has recently seen a rapid decline in its share price. This comes after the company reported negative earnings and the stock tumbled. This is far from their November 2021 highs of $350 per share. The recent crash and volatility in the crypto markets have caused investors to exit Coinbase’s platform. The earnings numbers were just the tip of the iceberg.

  • EPS came in at -1.98 per share vs .38 estimated
  • Revenue was down to 1.17 billion vs 1.48 billion expected
  • Revenue fell 27% against this period last year. 
  • Retail Monthly transaction users are down to 9.2 million from 11.2 million expected.

The numbers reflect much of what growth stocks shouldn’t be. With falling, user numbers and unpredictable cash flows, investors have good reason to stay away from Coinbase. This earnings report has to make long-term investors rethink their crypto investments. However, much of Coinbase’s problems are insulated to itself. Even though the entire market has been lingering, hyper-growth tech performance has been abysmal.

Investors aren’t being sold on the ‘innovation’ Coinbase is bringing. There are a variety of crypto trading platforms, and the space has become very saturated. These earnings now reflect how much the market became saturated. With retail trading numbers falling off a cliff, so has Coinbase’s earnings. Competitors such as Robinhood and Galaxy Digital have seen similar struggles. Many of these exchanges now trade close to their cash values as debt and lingering consumer problems meddle these former high flyers. Even with 0% interest rates, many of these companies couldn’t become profitable.

What Does This Mean For The Broader Markets?

This is a significant warning shot for any emerging crypto ecosystem as the very exchange that they market on has been compromised. Of course, there are web3 solutions such as DEX’s (Decentralized Exchange), but that isn’t the key issue here. It has to do with the popularity of these ecosystems. Developers need consumers, and if the demand for these tokens dissipates, more crashes could occur.

Coinbase stock is not alone. Many hyper-growth fintech names such as Upstart (UPST) and Robinhood (HOOD) have taken almost 80-90% declines in their share prices. In addition, the crypto market hasn’t been insulated well as Bitcoin (BTC) and Ethereum (ETH) are down over 50%. This doesn’t even include Terra’s recent 99.9% decline after the whole algorithmic stablecoin debacle. There has been no bottom in these assets yet as the market still needs to adjust to a new normal. From Russia-Ukraine, high energy costs, rapid CPI inflation, and a tightening fed are many reasons to fear the market.

These headwinds will remain here for some time. Investors need to keep in mind the holding period with crypto. Many investors who lived through the 2018 hype saw their investment plummet to similar multiples overnight. This is happening now and in full force. With stablecoin technology taking a black eye and web3 prices falling, there are few places to hide in the crypto ecosystem. The ripple effects of the Coinbase decline have yet to be fully seen.

Crypto may be going through a significant lull, but it won’t be malignant to the long-term thesis. There is enough committed capital to keep the crypto market afloat, and institutions seem to be holding on. Even though risk assets will continually get hit, this is only part of a market rotation. As the broader market is not yet equalized, more pain may come.

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